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TERM PAPER

OFHUMAN ELEMENTS AT WORK

TOPIC:- Golden Handshake :the need of an hour

SUBMITTED TO:- SUBMITTED BY:-

MRS.Amanpreet kaur Raghav Sharma

MBA

ROLLNO: B46REGD.NO: 11010867

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ACKNOWLEDGEMENT

I would like to express my gratitude for the many helpful comment and suggestions .I have

received over the last few days regarding the expository and critical expects of my term work

and especially for those comments which bear directly or may various argument for the center thesis of term work.

Most importantly I would like to thank my HOD (head of department) and my teacher Mrs.

Amanpreet Kaur for his days of supervision. His critical commentary on my work has played a

major role in both the content and presentation of our discussion and arguments.

I have extend my appreciation to the several sources which provided various kinds of

knowledge base support for me during this period.

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GOLDEN HANDSHAKE

A large payment made by a company to a senior executive upon termination of employment before his/her contract ends.A golden handshake is a clause in an executive employment contract that provides the

executive with a significant severance package in the case that the executive loses his or her jobthrough firing , restructuring, or even scheduled retirement. This can be in the form of cash, equity , and other benefits, and is often accompanied by an accelerated vesting of stock options .

Typically, "golden handshakes" are offered only to high-ranking executives by major corporations and may entail a value measured in millions of dollars. Golden handshakes aregiven to offset the risk inherent in taking the new job, since high-ranking executives have a highlikelihood of being fired and since a company requiring an outsider to come in at such a highlevel may be in a precarious financial position. Their use has caused some investors concernsince they do not specify that the executive had to perform well. In some high-profile instances,executives cashed in their stock options, while under their stewardship their companies lost

millions of dollars and thousands of workers were laid off.

Golden handshakes may create perverse incentives for top executives to facilitate the sale of thecompany they are managing by artificially reducing its stock price.

It is fairly easy for a top executive to reduce the price of his/her company's stock - due toinformation asymmetry . The executive can accelerate accounting of expected expenses, delayaccounting of expected revenue, engage in off balance sheet transactions to make the company's

profitability appear temporarily poorer, or simply promote and report severely conservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to(at least temporarily) reduce share price. (This is again due to information asymmetries since it is

more common for top executives to do everything they can to window dress their company'searnings forecasts).

A reduced share price makes a company an easier takeover target. When the company gets bought out (or taken private) - at a dramatically lower price - the takeover artist gains a windfallfrom the former top executive's actions to surreptitiously reduce share price. This can representtens of billions of dollars (questionably) transferred from previous shareholders to the takeover artist. The former top executive is then rewarded with a golden handshake for presiding over thefiresale that can sometimes be in the hundreds of millions of dollars for one or two years of work. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefitfrom developing a reputation of being very generous to parting top executives). This is just one

example of some of the principal-agent / perverse incentive issues involved with goldenhandshakes and golden parachutes .

Similar issues occur when a publicly held asset or non-profit organization undergoes privatization . Top executives often reap tremendous monetary benefits when a governmentowned or non-profit entity is sold to private hands. Just as in the example above, they canfacilitate this process by making the entity appear to be in financial crisis - this reduces the sale

price (to the profit of the purchaser), and makes non-profits and governments more likely to sell.

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Ironically, it can also contribute to a public perception that private entities are more efficientlyrun reinforcing the political will to sell off public assets. Again, due to asymmetric information ,

policy makers and the general public see a government owned firm that was a financial 'disaster'- miraculously turned around by the private sector (and typically resold) within a few years.

Golden Handshake: A Boon or a Bane

This is not a new management buzz but it is a term associated with a valuable commodity Goldso how golden is Golden Handshake we need to understand that and also its intricacies. We canDefine Golden handshake is a large payment made by a company to a senior executive upontermination of employment before his/her contract ends.

We can also define golden handshake as a clause in an executive employment contract that

provides the executive with a significant severance package in the case that the executive losestheir job through firing, restructuring or even scheduled retirement. This can be in the form of cash, equity and other benefits, and is often accompanied by an accelerated vesting of stock options.

Typically, "golden handshakes" are offered only to high-ranking executives by major corporations and may entail a value measured in millions of dollars. Golden handshakes aregiven to encounter the risk inherent in taking the new job, since high-ranking executives have ahigh likelihood of being fired and since a company requiring an outsider to come in at such ahigh level may be in a precarious financial position. This business term dates from the mid-1900sand is closely associated to golden parachute- a generous severance agreement for an executive

in the event of sudden dismissal owing to a merger or similar circumstance.

In the changed scenario of globalization, cost cutting by public sector undertakings andGovernment departments has become the order of the day. The first victims of the economymeasures are the employees, who are being made to pay with their jobs.

Be it any sector Railways, Banks, Textile Industry, Aluminium plants, Steel Plants, you nameany industry - Thousands of employees are going out of employment everyday. If we ask the

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companies one question - who is going to buy the products, if everybody is thrown out of jobs avast majority become burden of an employed few? We know nobody will answer it. The facts

prove that there are no buyers even after unbelievable gifts are offered with some products. Gothrough newspaper ads on any day the industry itself is getting a handshake - not so golden. Letus see what happens to the employees who receives "Golden Hand Shake”.

1. Those employees either start his own venture2. The money gets spend on their children's education3. The money also gets spend on their daughter's marriage4. Some money or amount is used for saving5. Most of the time it is found that the money results into expenditure affairs

Now if we see various issues how many people can get success in their own venture if they getstarted with business, very few so result is loss. Only exception is perhaps if you start the

business at very small level where you think there is less investment and income is guaranteedlike having a General Store or you turn out to be Vendors. Otherwise you are totally bankrupt.

The result is trauma all around. Spending days in utter frustration jobless seen as a spent force anoutcast an object of pity. Those who kept some money in savings schemes discovered in 4/5years time that the good amount of interest earned in yesteryears is nothing today due toinflation. If things go by the same rate what will be left over is only horror.

There is no government at the centre worth the name. Is there anybody to review it to retrace thesteps? Most unlikely. So "downsizing" will continue. Market will further shrink. Industry willface a fresh bout of crisis. The employees will still feel deprived.

They would find themselves in a helpless position and their future appears bleak. Most of thetimes they cannot even decide what to do with the few lakhs of rupees they get in by way of compensation package. Many of them end up burning their fingers by starting business ventureswithout proper planning.

There are several instances of employees, who had taken VRS, being harassed by their kith andkin and family members for money; Some VRS people have utilized the money to dischargetheir duty by their family. However, many of them who have been used to a busy life do not findit easy to sit back and relax at home. There is also a chance of some of them going intodepression due to constant nagging by their `near and dear' ones that they are sitting idle at a timewhen they should have been working. So Golden Handshake can never be a golden opportunity.

A golden handshake is a hefty severance package which is offered to senior executives and other high ranking employees. Often, the terms of a golden handshake are included in a hiringcontract, and they are viewed as insurance against sudden or involuntary job termination. Agolden handshake may also be offered to an employee to encourage him or her to retire; this iscommon in systems like schools, where long-term employees make more money, and it can bemore cost efficient to hire entry level teachers.

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The specifics of a golden handshake vary, depending on the position. Typically it includes alump sum of money, and it may also include stock options or securities, continued insurancecoverage, or payment into retirement accounts. A golden handshake also typically includes a fewweeks of full pay, especially if the employment termination was sudden, allowing the former employee a chance to recover.

Corporate executives are especially subject to shifting allegiances and company restructuring. Asa result, many demand golden handshake contracts to ensure that they will be compensated if their positions suddenly evaporate or radically change. Executives can also be made obsoletethrough rearrangement of departments, or they may be fired for poor performance or due to other issues with the company. Most executives are aware that their job security is very low, especiallyif they were brought into positions of high authority.Golden handshakes can also be sweeteners for mandatory retirement. In industries where retiringlong-term employees is a cost effective business decision, a golden handshake is almost used likea punishment. If the employee declines to retire, the offer will be retracted, and the employeemay take a loss. Employees may also be asked to retire due to declining job performance or age,

in which case a company may wish to provide recognition of the employee's years of loyalservice.

(1) Retirement incentive will save city $3.36 million employees accept early-retirement incentive; program will help avoid layoffs By Sena Christian, ThePress Tribune

The City of Roseville will save an estimated $3.36 million over the course of the next five years,now that 40 employees have accepted an early-retirement incentive.

This will also help the city avoid layoffs in the near future.

The Public Agency Retirement Services (PARS) supplementary retirement plan acts as anincentive to get top-step city employees to retire sooner than they would otherwise. Tom Goldie,director of central services, accepted the offer.

The 59-year-old has worked for the city since 2000, starting as a facilities manager. Since then,he has seen his department drop from about 70 employees to 40. By accepting the retirementoffer, he said the department will retain one position — although the director position will beeliminated.

“One reason I decided to leave is the budget was out of whack … and this is in lieu of more

layoffs,” Goldie said. “It was a tough decision to make in that I will miss the people I work witha lot. I’ve enjoyed my time here.”

The Roseville City Council unanimously approved the early-retirement incentive program duringits Nov. 3 meeting. On Sept. 1, the council passed the program on the condition that a cost-

benefit analysis shows the plan meets the city’s fiscal and operational goals. Councilmemberswere satisfied with the results of that analysis.

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Peter Surtees, a tax director at commercial law firm Deneys Reitz, said yesterday: “Gone are thedays of tax benefits accompanying huge payouts to directors.

Executives can expect all the proceeds of their endowment policies to go back into thecompany’s coffers until payment on disability or death,” he said.

Former finance minister Trevor Manuel raised concerns in the budget review last year thatdeferred compensation schemes were being used as up-front tax deductions for employers to

provide a mechanism for the deferral of tax to be paid by employees.

The 2010 Taxation Laws Amendment Act, which was gazetted last week, revises therequirements for key personnel who can receive a tax deduction in insurance schemes.

Mr Surtees said deferred compensation schemes were used by many companies as incentives toretain executives . An employer would take out an insurance policy on an employee’s life tomake provision for the additional retirement capital. On retirement, the payments would be taxed

according to a favourable formula, he said.

Peter Stephan, Association for Savings and Investment SA senior policy adviser, said the newlaw made radical changes to the Income Tax Act, which regulated the deduction of premiums onemployer-owned policies.

He said many employers used key person insurance to legitimately protect the business againstloss of profits in the event of a key employee or director dying, becoming disabled or sufferingfrom ill health.

But long-term insurance plans had also been used to provide employees with deferred

compensation, with the policy proceeds intended for the key employee being taxed at a lower taxrate. Mr Stephan said some parts of the new tax law were still not clear.

The new law will come into effect on January 1.

ANALYSIS- HERE IT IS PROVIDED WITH THE INCENTIVES INORDER TO RETAIN THE EXECUTIVES .AN EMPLOYER MAY TAKEOUT AN INSURANCE POLICY ON AN EMPLOYEE LIFE MAKINGPROVISION FOR THE ADDITIONAL RETIREMENT POLICY.

(3) Downsizing the Civil Service in Developing Countries: The GoldenHandshake Option Revisited.

Strictly speaking, we are not here talking about a golden handshake -a term coined for the'Fortune 500' managers; the civil service will never be able to offer anything close to a 'goldenhandshake'. We are talking more about an ECONOMIC JUMPSTART or an incentive for redundant staff to voluntarily leave the civil service and start productive lives that better contribute to the growth of the economy. (Landau, 1969) The economic jumpstart benefits both

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the individual and the economy. It is in this sense that our use of the term golden handshakeshould be understood.

In addition to financial incentives to leave the service, the procedures used for downsizing do notexclude the eventual mandatory dismissal of some staff (see below). Moreover, it is difficult to

predict whether such an economic jumpstart will also affect the performance of the civil servantsleft behind, i. e., whether downsizing can make the government machine work better after trimming.

Large-scale dismissal of civil servants is socially and politically unacceptable and is simply notfeasible. Attrition can probably downsize the civil service only about 4-5% a year; this rate may

be inadequate. (As our calculations for Kenya show below, double those numbers are neededroughly to bring the size of complement to desirable levels in about three years).

Variants of golden handshakes have been tried in several developing countries, but mostly withlimited success. It is contended that golden handshake exercises conducted in those countries

have still left many innovative options untried; we will explore them here.

When considering golden handshake options, one has to remember that it is not only the moneythe civil servants will ultimately consider, but also security; this may, ultimately, be the moreimportant factor.

It seems that any downsizing scheme will work better if the incentives package offered is at leastas attractive (or slightly worse, but with a perceived future potential) as staying on for a longcivil service career. Although designing and costing such a package may not be easy, a fewmethods may be suggested.

The benefits offered to civil servants in a downsizing exercise are a national issue. Therefore,one has to develop solutions that are compatible with what exists in the country. Benefits canconceivably be better than those found in the rest of the labour market, but not exceedingly so.One can definitely not give generous benefits to redundant civil servants being asked to leavewhen others -in a national context- get nothing; it is a matter of finding a balance. (Synnerstrom,1996)

The decision to downsize is a political one. Once the decision has been taken, two issues emerge:how much downsizing is needed?, and how fast does it have to be implemented to have thedesired measurable impact?

In addressing these issues, one must keep in mind that each country situation will be different,and also that the final target may matter less than establishing the speed of the desired change.There are simply no generally accepted scientific methods to calculate the number of positionsthat should be cut; downsizing is more an empirical, pragmatic and political process.

Therefore, what measures are there for deciding how far to downsize? First, one has to make surethat the government is not borrowing from its Central Bank to meet the payroll. Second, one hasto define the ideal mix of salaries (emoluments), O + M and capital investments (CI) desirable

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for a new government budget. Third, one has to choose the best plan of action that will bring onecloser to such an ideal mix.

Looking at existing ratios between salaries, O + M and CI is, therefore, the point to start todefine the above ideal mix for the specific local situation. Given understandable differences, a

ministry by ministry comparison of such mixes makes more sense. Conversely -in the case of thehealth sector for instance- it is possible to compare the same ratios between the non-governmental (NGO) sector with those of the government's health sector in the country. This canhelp come up with a more rational mix of salaries, O + M and CI.

The value of a methodology that proposes a better mix of percentage personnel costs, O + Mcosts and CI is that it helps determine a first downsizing target. Several avenues seem possible todo this. One could:

ANALYSIS- HERE WE FOUND THAT IN ORDER TO ACHIEVE A GOALWE HAVE TO DOWNSIZE EMPLOYEE COUNTING IN THECORPORATION SO THAT PARTICULAR TASK IS ACHIEVED BYPROVIDING EMPLOYEES WITH SOME BENEFITS THAT MAYBENEFIT THEM IN THE FUTURE.

(4) Soft Landings for CEOs

Some shareholders may object, but heads of most major financial servicesfirms will have very secure futures even if they're forced out

It's anybody's guess which chief executive of a major financial services firm will be the next tofall victim to the subprime mortgage mess—or when. But should the fallout spread, one thing iscertain: Many of the executives currently running financial services companies will leave withsignificantly less compensation than they thought. Most, that is, but not Richard Fuld Jr. TheCEO of Lehman Brothers has nothing to worry about—his exit package is valued at $299million, putting him close to the record for any such package.

By parsing proxy statements and crunching numbers, analysts can figure out roughly how muchthe CEOs of major financial services firms might take on their way out. Paul Hodgson, a senior research associate at The Corporate Library , did just that for the heads of 10 financial servicesfirms, at BusinessWeek.com's request.

Some of the numbers uncovered by The Corporate Library are staggering, but a scratch belowthe surface shows that what drives severance packages can vary widely from company tocompany. At companies like Bank of America ( BAC ) or Countrywide Financial ( CFC), the bulk of a CEO's exit package is tied up in retirement benefits.

Determing Their Own Fate

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At companies such as Lehman Brothers ( LEH ), Morgan Stanley ( MS), JPMorgan Chase ( JPM),and Goldman Sachs ( GS), most of a CEO's expected termination benefits come in the form of restricted stock. CEOs whose fortunes are so closely linked to the firm's stock price ultimatelydetermine their own fate. "Despite the large number of zeros, even within this very high-payingindustry, there is substantial pay for performance," says Ira Kay, global practice director for

compensation consulting for Watson Wyatt.

Case in point: Stanley O'Neal, who became the first chief executive who headed for the door after Merrill Lynch ( MER ) posted a $2.24 billion third-quarter loss related to mortgage troubles.While the massive size of O'Neal's exit package—the fifth largest on record at $161 million— raised eyebrows, pay consultants note that O'Neal pocketed only what was owed him, including$131.4 million in stock and stock options, as well as nearly $25 million in pension benefits.

However, he received no bonus. "O'Neal was pushed out with not so much as a goldenhandshake," says Frank Glassner, president of Compensation Design Group, an executiveconsulting firm in San Francisco. Glassner and other compensation experts say Merrill Lynch's

decision may set a precedent for other boards to take performance-based pay more seriously.Tenure Has Its Advantages

But no one is claiming a victory yet. Citigroup ( C) chief Charles Prince received a $12.6 million bonus, despite lackluster performance during his tenure. With a total walk-away package of morethan $40 million, Prince ranks ahead of four other CEOs on The Corporate Library's list.

At the top of pack—and far ahead of his colleagues in financial services—is Lehman's Fuld, whocould be entitled to an exit package worth nearly $299 million. The bulk of it is $276 million inrestricted stock, some of which was awarded in the 1990s. Fuld's expected payout outshines

everyone else in the industry because he has worked at the investment bank since 1969 and hasrun it since 1993.

Even so, the package has raised some eyebrows.

(5) A Lesson in Simplicity - Case Study

.

Once upon a time, (all good stories start out with that don't they?) there was a North Americanhi-Tech company, we'll call them NatCo for convenience, that was feeling the stresses of

competition from a rival Asian company, whom we'll call "Offshoring" for purposes of anonymity. In the interests of research into better management of projects (I have to bring in

project management some how, don't I?) NatCo decided to invite Offshoring to engage in acompetitive project.

After much hard negotiation on both sides, the parties finally agreed on a project. This projecthad to be held where there could be little political influence, and Canada was the obviouscountry of choice. The project also had to be independent of any high technology content, for

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fear of exposing trade secrets. The one finally selected was a canoe race to be held on the SouthArm of the Fraser River, here in British Columbia. Because of its length, the race was called TheLong Race. The Fraser River is a major river that flows through the low-lying delta area just tothe south of Vancouver

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Anyway, both teams practiced long and hard. On the big day, the weather was fine, the water calm and everything ready and just right. The Offshoring team won The Long Race by a coupleof klicks. [3]

As a result of this, NatCo became very discouraged by the severe loss and their morale sagged.Corporate management decided that the reason for the crushing defeat must be thoroughlyinvestigated. A Continuous Measurable Improvement Team (CMIT) was formed consisting of senior executives with a mandate to examine the problem and do whatever it takes to apply acorrective action plan.

After several highly secretive meetings, the CMIT finally agreed on the cause. The Offshoringteam had six people paddling and one steering whereas NatCo had one person paddling and six

people steering. Since this was a matter of corporate prestige, the CMIT hired the best projectmanagement consulting company in the country, but not from Canada you understand, toexamine the problem and recommend appropriate corrective action.

After some time and several million dollars later, that's US dollars of course, the PM consultantsobserved that while "too many people were steering and not enough were paddling" there wasalso a failure to adopt best practices in project management. In fact they identified no less thanseven processes that should be added, thirteen that should be renamed and two deleted to comply

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with latest published recommendations. In addition, a project such as this should have seriousmanagement attention and visibility at the highest corporate level.

Accordingly, to prevent losing to Offshoring the following year, NatCo decided to institute anew management structure to oversee a much improved project management process. A program

of four projects was therefore launched: Canoe acquisition; Paddle acquisition; Paddler andSteerer selection; and Paddler and Steerer training. Four project managers were appointed alongwith four technical sponsors (the functional divisions wanted in on the act) and these peoplewere designated as Project Directors. A Program Manager was appointed to manage the

program. To give the required corporate visibility at the executive level, a new vice-president position was created: VP-Competitive racing.

Following a risk analysis, it was observed that the Lower Fraser River is tidal and the water can be quite rough. To mitigate this risk, several selected steerers and paddlers were sent to the localmaritime institute to obtain their certificate of perfect marine paddling (pmp). However, theProgram Manager determined that steerers and paddlers with a pmp certificate would not

actually be deployed in the race unless absolutely necessary because certificated personnelexpected more money and proper project cost control must be maintained over the program.

Instead, a new performance standard was established to incentivize the work of canoe paddlersand thereby enable the possibility of becoming a "six figure performer". Management called this"empowerment". A small breakout group from the Paddler and Steerer selection project wasformed to examine the issue of ratio of steerers to paddlers. However, since steerers dominatedit, the group concluded that any change in ratio was "not consistent with NatCo's managementculture", so no changes were recommended.

ANALYSIS-NatCo promptly laid off all canoe steerers and paddlers on the

grounds of poor performance or expectations, sold all its paddles, canceled allcapital investments in new canoes, awarded a high performance certificate tothe PM consulting company, re-assigned all Project Directors and Managersto other duties, and used the money saved as a "golden handshake" for theVice-President.